New Reporting Framework Will Eliminate “Noise” for Bankers, Other Financial Statement Users

Posted by Guest Blogger on Jan 29, 2013

In my almost 20 years in the banking
industry, I’ve come across dozens of owners and managers of small private
companies who cringe when it comes time to prepare financial statements. That’s
because for many of them, the process is complicated, time consuming and
costly. Moreover, a number of rules they are required to follow do not deliver
financial information relevant to their businesses. These small- and
medium-sized entities have been in need of a financial reporting option that is
tailored to their circumstances and produces financial statements and
information that their bankers can use and rely upon. Now, finally, that
financial reporting framework is being made a reality.

One of my most rewarding professional
experiences has been serving on the task force that is developing the new Financial Reporting Framework for Small- and Medium-Sized Entities. What’s a SME? No standard definition exists, but the acronym is self
explanatory – small and medium size entities, which happen to make up about 20
million for-profit companies in the United States.

The planned FRF for SMEs is not intended
for everyone, like those who are required to use GAAP. But for those
looking for a reliable and more cost-beneficial framework that incorporates comprehensive
accounting principles, has undergone professional scrutiny and was developed by
those in the CPA profession, this framework will come as welcome relief. It
will allow owner-managers to prepare financial statements that help them confirm
their assessments of performance, what they own and what they owe and help them
better understand their cash flows. And, importantly, the FRF for SMEs produces
relevant financial statements, cutting out the “noise” that often clutters financial statements and can distract a
banker and other users from the salient information.

From my experience as a banker, the new framework will be most
appropriate for small- and
mid-sized privately owned companies without complex financial statements,
ownership that is not expected to change in the near term and those with lower
levels of credit exposure. It will also be particularly valuable in situations in which the user of the financial statement has direct access
to the organization’s owner or manager. Use of the framework will be voluntary,
and it is not meant to replace U.S. GAAP. In fact, the AICPA’s project to
develop a framework for smaller private entities which would be used as an
other comprehensive basis of accounting (i.e., a non-GAAP accounting framework)
has the encouragement of the Financial Accounting Foundation, which oversees the
Financial Accounting Standards Board. Quite simply, the new framework provides an alternative that is sorely needed in the marketplace.

Bankers and other lenders
are often flexible in accommodating various financial frameworks for smaller
entities. I know that in my own case, we will welcome the new framework
because it will provide us with relevant information in a familiar way using traditional
accounting principles. It will, for example, use historical cost as its
measurement basis rather than fair value, and it will not require consolidation
of what are known as variable interest entities.

Furthermore, I find the FRF for SMEs very
appealing because it will be a reliable, comprehensive and consistently applied
framework that has been developed by the AICPA and will save my customers money.
When making lending decisions related to smaller businesses, I need financial
statements that will help me focus on cash flow and contain only relevant
information. I believe the FRF for SMEs will provide financial statements that
will do just that.

The task force expects the framework to be finalized later this
spring. I’m personally interested in hearing what other bankers
and CPAs think about the new opportunity, so in addition to weighing in on
the exposure
draft by the Jan. 30 comment deadline, I also welcome
comments to this blog.

Theresa Bible, SVP - Credit Manager, Enterprise Bank & Trust. Theresa works in the St. Louis office of Enterprise Bank & Trust, which focuses on serving privately held businesses and their owners.